Millions of people will suffer "real pain" as town halls saw their budgets slashed by George Osborne, it was warned yesterday.

Vital services including home help, community care and support for the elderly will be hit by the cuts, the Local Government Association warned. The budget for local authorities will be cut by 28% over the next four years - down from £28billion to £21billion.

And funding for housing was also hit, leaving hundreds of thousands of people languishing on the waiting list for a decent home.

New council house tenants will have to pay substantially more with rents rising to 80% of the market rate.

But only 150,000 new homes will be built over the next four years, far fewer than needed.

And the news sparked warnings that the number of homeless people will rise.

Baroness Margaret Eaton, the head of the Local Government Association, said that shortfall would cause "pain and anxiety" across England.

According to Baroness Margaret: "This spending review will hit councils and the residents they serve very hard and will inevitably lead to cuts at the front line.

"Town halls will now face extremely tough choices about which services they can keep on running. These cuts will cause real pain and anxiety for millions of people who use the services councils provide, from keeping children safe to ensuring that streets are clean," she said.

And Iain Hasdell of KPMG said the £7billion shortfall could see councils face "financial collapse". He reckoned that balancing the books "would be beyond some councils which will run out of cash".

Campbell Robb, chief executive of the housing and homeless charity Shelter, also criticised Mr Osborne's ruling on housing. He said: "It is a huge blow to see that housing, one of the most basic needs for every single person in this country, is facing some of the biggest cuts.

"A succession of governments has failed to address our housing crisis and today's announcements suggest the coalition has firmly joined them in denying responsibility for an entire generation's ability to access decent, secure, affordable housing."

Mr Robb added last night: "The proposed figure of up to 150,000 affordable homes over four years represents less than a third of what this country urgently requires to bring the housing system from its knees."